8/8/2019 Asia Breathes a Sigh of Relief

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By Bce Eih

Hong Kong

American home buyers

havent been the only ones

counting on the supposed reliability o

Fannie Mae and Freddie Mac. The two

companies bonds have become avor-

ites o Asian governments looking or

somewhere to put the dollars generated

by big trade surpluses with the U.S.

Until recently, it made sense. The mar-

ket was booming, yields were slightly

better than plain-vanilla Treasuries,

and everyone assumed Washington

backed the mortgage companies.

As the U.S. housing crisis deepened

and Fannie and Freddie started sink-

ing, though, oreign bankers wanted

assurances that their assumption

was correct. Treasury saw oreign

governments getting the willies, says

one Senate aide. Especially those in

Asia: Four o the top ve international

holders o Fannie and Freddie paper are

Asian. Chinese hold $376 billion, Japa-

nese have $228 billion, South Koreans

$63 billion, and Taiwanese $55 bil-

lion. (Russia is No. 3, with $75 bil-

lion.) Deepening problems at the two

enterprises spurred urgent phone calls

to Washington. Chinese banks were

probably acing signicant losses, says

Logan Wright, an analyst with Stone &

McCarthy Research.

This summer, the oreigners started

pulling back. In July, the Bank o China,

a state-controlled commercial bank,

trimmed its holdings o the agencies

debt by selling or choosing not to roll

over $4.6 billion o their bonds. Aer

increasing by an average o $22 billion a

month in the rst hal o

2007, central bank hold-

ings o Fannie and Fred-

die securities in Federal

Reserve custody ell by

$27 billion rom mid-July

through early September,

according to Brad Setser,

a ormer Treasury Dept.

ocial and now a ellow

at the Council on Foreign

Relations. The threat

o a central bank buyers

strike was real, he says.

The efective nation-

alization o Fannie and

Freddie was just what

the Asians wanted.

Chinese bankers elt the

bonds were like Treasuries, says Yi

Xianrong, a researcher at the Chi-

nese Academy o Social Sciences, so

there was no question the U.S. had tointervene. We never had any doubt

Washington would come to the rescue,

says Ha Keun Cheol, economist in

Seoul with the Bank o Korea.

nowHErE to run

Now that Treasury Secretary Henry

Paulson has made his move, will Asias

bankers be more comortable with

relying so much on Fannie and Freddie

paper? The Sept. 7 intervention likely

makes their debt a saer optionand

central banks may have little choice.Those trade surpluses are U.S.-

dollar-denominated, and as many

European economies weaken, the euro

isnt a very attractive alternative, says

Goldman Sachs analyst Roy Ramos. For

Asian bankers, theres only so much

you can do to diversiy away rom the

greenback, Ramos says.

Thats not to say theres no downside

or Asia. The U.S. housing crisis is still

real, and the economy is struggling.

Already Chinese exports are slowing

as American consumers close their

wallets. Continuing weakness in the

U.S. might urther hurt Asias exports

which could, o course, slow growth

in their oreign reserves and make big

investments in U.S. debt less necessary.

For now, though, Asias central

banks are emerging as winners. They

have nothing to complain about

theyre made whole, says Edwin M.

Truman, an econo-

mist who headed the

Feds international

nance division rom

1977 to 1998. The

act o the matter is,

i Fannie and Freddie

cant pay, you and I

will. ^

With Theo Francis

in Washington,

Chi-Chu Tschang in

Beijing, Moon Ihlwan

in Seoul, and Hiroko

Tashiro in Tokyo N i r E l i a s / a P P h o t o

036

nEwS

BuSInESSwEEK I SEPTE MB ER 22, 2008

Foreign FundsTop ve non-U.S. holders oFannie and Freddie debt*

BillioNs

Chia $376

Japa $228

rssia $75

Sh Kea $63

taia $55

* a f June 30, 2007D: treury Dep. (U.s.)

asia breathes

a sigh oF relieFThe effective nationalization of Fannie and Freddie

reassures governments holding tons of their paper

HOUSING

CRISIS

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